### Amway: The Untold Story

Amway Statistics

In the past there have been many postings here dealing with the statistics of success in Amway. Here is my analysis. Let me begin by issuing a disclaimer of sorts. I am motivated by statistics and feel they are important to informed decision-making (not everyone feels so, of course), though they do have some limitations. First, it is possible to manipulate statistics to support virtually any viewpoint. Second, to make an analysis manageable, it is often necessary to make some qualitative assumptions (such as what constitutes a sufficient and representative sample, etc.). Finally, probabilities and statistics are properly applied to large groups and care must be taken when they are applied to individual situations. For example, a high school student with a good academic record might desire to apply to a prestigious, highly selective college. This college might accept only one out of every ten applicants, yet I would not attempt to dissuade this student from applying based only on this fact. He may have distinguishing characteristics that would lead one to believe that he was more likely to be accepted than the one in ten odds would indicate, and it is also probably true that he has little to lose and it is worth the risk regardless of the odds.

Thus, I am familiar with the routine retort given by pro-Amwayers along the lines of "Are you planing to be average." Though I acknowledge that decisions should not always be based solely on statistical likelihood, I do believe statistics should be carefully examined. The "Are you planing to be average?" retort really irritates me. The implication is that the statistics don't apply in the specific case, that one's individual level of effort will make success much more likely than the statistics indicate, or that statistics are in general unimportant and not worthy of consideration. But statistics *are* used extensively by the Amway promoters. Anyone prospected by an Amway distributor has probably seen the statistic that for every one hundred people at age 25, only 5 are financially independent at age 65--this is a favorite statistic to use when presenting the plan. Many others, such as the failure rate of businesses and the initial costs of establishing a franchised business, are quoted freely and emphatically. Yet as soon as statistics against Amway are mentioned, they are are immediately brushed off as being insignificant or being an erroneous basis to hold a view against Amway. Whenever one uses statistics to support his position, he opens the door to their use and must be prepared to squarely face statistics against his position.

That was a rather long-winded preamble, but it is a point I have not seen fully addressed before. Anyway, the following analysis is based on information present in the SA-4400 and was the analysis I went through to initially justify some of the negative views I was beginning to foster at the time. Statistics from other sources later supported the essential conclusions. I have tried to be objective and to state the assumptions and limitations of this analysis.

I begin with the "active distributor" statistic. From the current SA- 4400, 46% of all distributors are active. I will use percentiles to correlate a given success level and its approximate relation to the overall pool of Amway distributors (percentiles are commonly found attached to standardized test scores--a percentile rank of 80 indicates that 80% scored lower and 20 percent scored higher). I put these 46% at the bottom (though in some sense they might not be the least successful, as I will show shortly)--thus someone who meets the active distributor criteria would be at the 46th percentile or above. By definition, an inactive distributor has made no retail sales and did not receive any bonus money. Thus, their only source of income is from personal use of products. This is most properly taken to be 0 inasmuch as for sales and income tax purposes distributors are allowed to sell to themselves at wholesale, and a footnote on the 1991 SA-4400 confirms that the basic discount is not included in income for products personally consumed. It could be argued though that the intrinsic value of the products is equal to the retail price, and they thus have a gross income of up to \$60/month (assuming that they did not receive bonus money because their PV was under 100, not because the 10 customer rule was enforced.) Since these people did not attend meetings, present the plan, or attempt to make any retail sales, there expenses should be virtually zero and their net profit is equal to their gross profit.

The \$60/month figure above is based on the assumption that 100 PV = \$200 BV = \$200 retail price = \$60 basic discount. The actual relationship between each of these varies considerably from product to product, and for "catalog" products is more like 90 PV = \$100 BV = \$300 retail price = \$60 basic discount. I selected a two month period at random, totaled all products ordered for that period, and arrived at the following ratios: 100 PV = \$186.92 BV = \$281.61 retail price = \$49.23 basic discount. The actual average relations are given near the back of the SA-4400 and state that the basic discount averages 30%, that BV averages 87% of retail for non-catalog and 33% of retail for catalog, and that the BV/PV ratio is in fact 2.0. The approximations used in the SA-4400 thus seem to be rather liberal, but I will go ahead and use them anyway since most people are familiar with these ratios. Returning to the active distributor statistic, it has been said on the one hand that this inflates the other SA-4400 statistics since it eliminates the bottom 46%. It has also been said that the inactive distributors, and even many active distributors, don't really make much of an attempt at making a profit. Both statements are true. I am not sure of the definition of the term "bonus money" as used in the survey, but I interpret it to include what is called "residual bonus money," that is, money such as that earned from MCI usage and payable even if the monthly PV is under 100. Thus, to be active, a distributor need only make a long distance telephone call using MCI and do nothing else. Yet 46% of the distributors don't do that!?? That in itself is a pretty revealing statistic. Anyone starting in Amway should realize what a large percentage of their downline will do little or nothing. Personally, I would like to see the active distributor criteria made more stringent. This would increase the stated earnings but would also lesson the validity of the argument that the figures include many people that don't make a serious attempt at making a profit.

The next group of distributors is the active non-directs. The SA-4400 states that about 1% of all active distributors qualify as directs. Since 46% of all distributors are active, that means about 0.5% of all distributors are direct distributors--or that direct distributor qualification places one at the 99.5th percentile. The active non- directs thus comprise the 46th to 99.5th percentiles. The hypothetical examples given in the plan place the gross monthly income for these people between \$66 and \$2,138. The 1991 SA-4400 contained some additional earnings information that allows us to look at this group of distributors in more detail. This earlier SA-4400 contained a chart giving "Distribution of monthly total sales at BV." I have converted the percents to cumulative percentile ranks and set the active distributor with zero sales at the bottom of the active distributor pool (46th percentile). The results follow:

```Percentile     BV
--------------------
59.7           \$1
66.4           \$50
79.8           \$150
89.1           \$350
95.3           \$1000```
The above gives sales in BV. Gross income depends both on the personally sponsored downline structure and the percentage of volume due to retail sales. The hypothetical examples assume \$200 BV in retail and equal distribution of the remaining volume across six personally sponsored distributors. In my experience, the reality is that there will be one or two strong legs and many others with very low volumes--this would tend to lower earnings slightly. Also, \$200 BV in retail sales is also high, as the same chart shows the average amount for all active distributors to be \$95. The average personal consumption in BV is \$89, so anyone with a monthly BV of under that is likely to be predominately due to personally consumption--which brings only bonus income. So in many respects, the hypothetical examples tend to distort the gross income amounts somewhat to the positive side. Making use of them (taking the first \$200 BV to be retail sales distributing the remainder evenly across six personally sponsored downline distributors), though, gives us the following result:
```Percentile       Monthly Gross Income
-------------------------------------
59.7                 \$ 0.300
66.4                 \$ 15.00
79.8                 \$ 45.00
89.1                 \$ 70.50
95.3                 \$108.00```
BTW, the active distributor has an average BV of \$513 and an average gross income of \$65 which would put him a little below the 87th percentile in terms of income and a little above the 87th percentile in terms of volume. The active distributor with the average income is actually out-performing about 87% of all distributors.

The SA-4400 figures are gross income figures and do not consider expenses, so I must rely here primarily on my personal exposure to Amway. Those with a BV of under \$200 are not very active--at most their expenses consist of mileage to one local meeting per month and one tape per week. If their BV is over \$200, though, their expenses rise sharply--they are probably rather rigorous followers of "The System." There are a few distributors with large volumes that focus their efforts on retail sales and/or do not spend money on motivational materials and meetings--which IMO is the best approach. I will focus here, though, on the traditional approach and methodology that most prospects and distributors would encounter. The traditional approach will have one believe that the following are necessary minimum monthly expenses:

```8 tapes/month (\$5.50 plus tax & shipping):     \$ 48.40
1 book per month                         :     \$  7.00
1 "open" meeting                         :     \$  5.00
1 "seminar/rally" meeting                :     \$ 20.00
0.33 "functions"                         :     \$255.00
Misc Sponsoring Supplies                 :     \$ 10.00
Telephone costs                          :     \$ 25.00
Mileage                                  :     \$129.60

TOTAL                                    :     \$500```
I have used above actual current prices for books, tapes, and meetings and assumed that a couple is operating the business and both attend the meetings.

The function cost is based on 4 functions/year, a private room for the couple and \$300 per function in transportation costs for the couple. Telephone costs include voicemail fees and about \$10 in long distance charges. Mileage is based on the standard 27 cent per mile rate, 30 miles round trip to each activity and includes 2 meetings, 10 "Showing of the Plans", and 4 product pick-ups per month. Obviously, mileage, telephone, and function transportation costs could vary significantly depending on individual circumstances; I have tried to pick what I feel are conservative typical values. Actually, one is supposed to think nothing of driving 90 miles one way to present the plan or attend a meeting. Our actual monthly expenses over a 12 month period in which we followed the traditional methods fairly rigorously averaged \$508.81.

As mentioned previously, anyone with under \$200 BV per month probably has much lower expenses--in light of the time and money demanded by "The System," anyone committed to it is also likely to be committed to at least \$200 BV in personal consumption of products. I will estimate the expenses of those under \$150 BV at \$38 per month. I will also consider expenses to be fixed at \$500 per month for those with over \$150 BV. In actuality, expenses do increase somewhat for those distributors with larger downline groups (they tend to swallow some of the shipping costs, and travel to support out-of-town groups, for instance.) The net profit thus works out as follows; I have continued to rank them based on product volume:

```Percentile               Net Monthly Profit or (Loss)
-----------------------------------------------------
59.7                         (\$ 38.00)
66.4                         (\$ 23.00)
79.8                         (\$455.00)
89.1                         (\$429.50)
95.3                         (\$392.00)```
I continue now to the direct distributor level and above. This puts us at the 99.5th percentile and a minimum of \$15,000 BV. Again using the hypothetical structure, their monthly gross income is \$2,034. With \$500 in expenses, their net profit is \$1,534 per month. That is pretty respectable, but it does not excite me too much in light of the fact that it is less than I earn in my regular profession (albeit full-time) and only half of one percent make that much. Also, at this stage the hypothetical network structure can significantly distort the earnings. For instance, if the 7,500 PV was earned via one 5,000 PV leg, two 1,000 PV legs, four 100 PV legs, and 100 PV in retail sales/personal use, the net profit would be \$706.

Then, we arrive at the higher pin levels. The SA-4400 doesn't give many statistics at this point. The next level of success after qualifying as a direct distributor is to have someone in their downline qualify as a direct distributor and earn a leadership bonus. To do this entails that your total downline BV is consistently doing at least \$30,000 per month, since the direct distributor in your downline must have at least 7,500 PV in *his* downline, which is no longer included in your group PV. The 4% leadership bonus then pays \$600 per month bringing the hypothetical net profit to \$2,134 per month.

At this point, you probably also qualify for a profit sharing bonus, which averaged \$145.50 per month.

Let's look at the Emerald Pin level, a person who qualifies for the Pearl and presumably also qualifies for the Ruby bonus. This requires \$30,000 BV per month in your personal group and personal sponsorship of three direct distributor groups at a minimum of \$15,000 BV each. His earnings might appear as follows:

```Personal Group (\$30,000 * (25% - 18%))  =   \$2,100.00
Profit Sharing Bonus =                      \$  145.50
Ruby Bonus =                                \$  517.00
Leadership Bonus on 3 direct distributors = \$1,800.00
Pearl Bonus =                               \$1,160.00
Emerald Bonus =                             \$  539.25
Basic Discount =                            \$   60.00
TOTAL GROSS EARNINGS =                      \$6,321.75
Less Expenses                              (\$  500.00)
=========
NET MONTHLY PROFIT =                        \$5,821.75```
I have taken the average amounts of the bonuses for profit sharing and above and again assumed 6 distributors with equal volumes in the personal group as well as the minimum leadership bonus amount, but this gives a general idea of the income of an Emerald. This is now approaching the "Thousands upon thousands of dollars land in our mailbox every month while we travel to faraway exotic places" income and lifestyle that is routinely represented to prospects and distributors via "The System." The pay compares favorably to most occupations--the husband and wife together might invest 40 hours per week and I am sure most employees earn less than \$70,000 per year.

Once again, though, this does not excite me too much once I consider the percentage of people that achieve this level. The SA-4400 does not give us this information. Given, though, that one out of every 200 distributors is a direct distributor, and the above example requires a minimum equivalent volume of five direct distributors, we can estimate that only one in 1000, or 0.1%, achieve the above success. We are now at the 99.9th percentile.

Finally, the coveted diamond pin. A diamond would earn the above profits, plus \$1,800 on the additional three direct groups, plus an average diamond bonus of \$2061 per month for a total profit of \$9,683 per month. Again this example makes many assumptions and can only be taken to give a general idea of income. A diamond would in fact be likely to earn above average amounts in each of the lower bonus categories. Also, I am only considering the income from Amway product sales. The SA-4400 does give us some clue as to the percentage of distributors that qualify as diamonds. It states that 0.8% of the direct distributors who qualified for a leadership bonus earned a 3% bonus of over \$34,128 or more annually. At the 3% bonus level (the leadership bonus now pays four percent), a diamond would earn a minimum of \$32,400 for his six personally sponsored direct distributors provided they maintained a constant volume over the entire year. The SA-4400 does not tell us how many direct distributors qualify for a leadership bonus. Even if every direct distributor qualified for a leadership bonus, though, the percentage of diamonds would equal 0.8% of 0.5% , or 0.004%. Thus a diamond must rank near the 99.996th percentile or above.

So when someone says "This is so easy--to go diamond all you have to do is go direct and then help six others go direct" or gleefully says "I'm going diamond and you can to!!" be aware they are really saying all you have to do is be in the upper 0.004%. Once again, statistics are not everything--any given person might really have (or be able to develop) whatever characteristics are required to be in that 0.004%. Few people have that much confidence in themselves, though. In any event, the same reasoning applies to conventional business as well--I might be the one to climb the corporate ladder to the top of a 25,000 employee company.

Here is a summary of what I have discussed:

```Percentile   Gross Monthly Income     Net Income (Loss)      Category
---------------------------------------------------------------------
99.996       \$10,183.00                  \$9,683.00            Diamond
99.9          \$6,321.75                  \$5,821.75            Emerald
99.5          \$2,034.00                  \$1,534.00             Direct
95.3            \$108.00                   (\$392.00)            >500PV
89.1             \$70.50                   (\$429.50)            >125PV
79.8             \$45.00                   (\$455.00)             >75PV
66.4             \$15.00                    (\$23.00)             >25PV
59.7              \$0.30                    (\$38.00)              >1PV
46.0              \$0.00                    (\$38.00)        0PV active
under 46          \$0.00                      \$0.00           inactive```
Everything above, though, only gives a snapshot--that is, the income distribution of distributors at any given time. It is logical to assume that time and effort, the number of distributors in one's group will increase and that those distributors will constitute growing volume, and growing profits. That of course is the hope of most network marketers. Thus, given only the information that "John Doe is an Amway Distributor" it is proper application of the above statistics to say "The probability that he is a direct distributor is 0.01." It is not, however, proper given the information "John Doe has just signed his name and is now an Amway distributor" to state "The probability that he will eventually become a direct distributor is 0.01."

What, then are the prospects for success if one keeps working long enough? Returning again to the SA-4400, we see that overall retail Amway sales grew from \$1.9 to \$3.9 billion between 1989 and 1992. That represent a growth rate of 27% per year. When presenting the plan, many prospects are shown this and told "look at this phenomenal growth--you can't go wrong." Here is a closer look. Inflation has lately been about 4%, I believe, so that represents 23% real growth. This growth could come from two sources: 1) additional distributors, or 2) additional sales and consumption by existing distributors. I think the former is the dominant factor, though sales/consumption per distributor has also probably risen somewhat due to an expanding product line. Since earnings are based on product volume, the exact source won't really matter for the example below; I will assume it to be from additional distributors.

I thus make the assumption that the annual overall growth in distributors is 23% and will continue to be 23% The latter is a highly speculative assumption and is the essence of the arguments about the dreaded "s" word. I further assume that the existing pool of distributors is indistinguishable-- that is, the sponsorship of new distributors each year that make up the 23% will distribute evenly across the existing distributors. The implication then is that each distributor will personally sponsor 0.23 new distributorships each year. A person with a group of ten (nine downline plus himself) would similarly expect his group to experience a net growth of 10*0.23= 2.3 new distributorships. More will be sponsored, but some will quit. Obviously, an experienced, successful distributor would probably have a higher rate of sponsorship and an inactive distributor would almost certainly have a lower rate of sponsorship. Also, the growth rate is likely to be higher internationally (where Amway is often new) versus domestically.

Anyway, the following gives the group size at the end of each year of a distributor that joins at the end of year one, never quits, and is otherwise typical. I have made a rough correlation between his group size and his approximate earnings making use of the earlier analysis (group size of 200 to be direct, 1000 to be emerald, etc.) and some "eyeball" interpolation--and this time taking his expenses to be consistently \$500 per month:

```Year    Group Size   Net annual profit              Cumulative profit
---------------------------------------------------------------------
1            1.0      (\$5,280)                      (\$5,280)
2            1.23      (5,280)                      (10,560)
3            1.51      (5,280)                      (15,840)
4            1.86      (5,280)                      (21,120)
5            2.29      (5,280)                      (26,400)
10           6.44      (4,704)                      (52,224)
15          18.00      (2,000)                      (73,040)
20          51.00      (1,000)                      (82,040)
25         144.00           0                       (86,040)
30         405.00      18,408                       (67,632)
35       1,140.00      69,861                        75,861
40       3,208.00      75,000                       430,305
45       9,032.00      80,000                       810,305
50      25,427.00     116,000                     1,130,421```
Under this scenario, it takes about 28 years to qualify as a direct distributor.

Individual efforts will obviously have an effect on growth rate. It is quite likely one could outperform the average overall growth (we ourselves did), though as the group grows the one or two exceptional distributorships will have a decreasing influence on the group as a whole, and the growth rate will tend to approach the statistical values (If I am not mistaken, this is known as "The Strong Law of Large Numbers"). If the growth rate is doubled to 46% per year, the direct distributor level is attained in 14 years.

I feel the often claimed "2 to 5 year plan" to reach the diamond level is unsubstantiated. Offering evidence that the claim is valid because "John and Jane Doe did it--here is their picture and story in Profiles of Success is a classic example of the logical fallacy that the exception proves the rule.

That concludes my analysis of the potential of Amway. What I have done here can be easily verified by anyone with access to an SA-4400-- which should include anyone prospected. I know it is not like a lottery--individual efforts and characteristics can allow one to beat the statistics. But Amway is not the great can't-go-wrong absolute best business opportunity that it is often preported to be.